5 MUST KNOW PRICING STRATEGY ETHICS ISSUES

VIVIAN GUO
Updated On: May 21, 2017
Some ethical issues are extremely easy to understand: don’t steal, treat others with
respect, and always put down the toilet seat for your lady friends. However, when it comes
to the market, the concept of what is right and wrong is a bit blurrier. Of course you can’t
exploit children for a lbaor force, but  Is it a business’s right to price however they want?
After all, if the number is too high or the marketing too egregious, then consumers won’t
buy right?
Well, not exactly. Over the years, governments have put laws on the books for the most
heinous of fraudulent pricing strategies, but even then some tactics are considered quite
unethical, and you may be committing these missteps without even knowing. We touched
a bit on the ethics of natural disaster price optimization in a previous post, but in order to
fully understand the scopes of pricing ethics let’s take a look at a brief overview before
diving into five main concepts you should stay far away from in your business.
Pricing: More ethics than legality
There is a general consensus that marketing strategies must not infringe on values like
honesty, transparency, and autonomy. As such, the main crux of pricing ethics concerns
the establishment of a balance of power (through information) between the producer and
the consumer. In a completely free market, producers often have the upper hand because
they are in control of their products and processes. This potentially lead to unethical
practices (using cheap or harmful materials, lying about benefits, etc.), which are deemed
harmful for society as a whole.
Interestingly enough though, even with this possibility only a handful of pricing practices
are regulated by the government, mainly because you’re not really sure someone had
broken a pricing law until you see results. For example, while predatory pricing, aka
pricing extremely low to drive competitors out the market, is illegal, it’s difficult to prove that
the price decreases had such an intention and were not simply the result of competitor
based pricing. It’s like telling a child that he can have a cookie only if he finishes his
vegetables, but with no way to discern if the kid ate the peas or if they were slipped to the
dog. Essentially, most laws blindly attempt to curb motivations for doing things, rather than
results.
As a result, pricing ethics and legality sit in a grey area, constantly ebbing and flowing
between right and wrong. To better protect you and your business, here are some of the
most common pricing practices that sit on a razor’s edge of ethics and legality.
1. Price fixing: Collusion at its worse
Price fixing involves the an agreement between a group of people on the same side of a
market to buy or sell a good or service at a fixed price. Typically, competition between
these participants for consumers drives down prices for goods. Yet, imagine a world where
every ice cream shop in America vowed that all single scoops were now $15. Consumers
would lost out, because we’d find alternatives or shell out an exorbitant amount of cash, as
we couldn’t go to another neighborhood joint to battle the high prices/low quality offering of
another.

Photo Credit: bitzcelt

The potential blow to consumers is why horizontal price fixing is illegal, which means
corporations on the same level of the supply chain cannot agree on a target, maximum, or
minimum price (among other things). This form of fraud can be prosecuted under the
Sherman Anti-Trust Act. The Supreme Court did rule, however, that vertical price fixing is
allowed. For example, wholesale companies can limit how much retailers charge for
clothes.
The bottom line: Look at your competitors to understand the market, but don’t get in a
room with them and try to take advantage of consumers. Check out more
about competitor based pricing.
2. Bid rigging: Favoritism
This one’s more for the proposal crows, but bid rigging involves promising a commercial
contract to one group, even though you make it look like multiple parties had the
opportunity to submit a bid. Not only is this a moral no no, but it’s also one of the few the
government follows up on, especially within their own ranks, because of the number of
bids and contracts the government deals with on a yearly bases. This practice hurts
consumers considerably, because the best producer doesn’t receive the work necessarily.

There are many variations of this offense, and all include some pre-determined
agreements between corporations involved in securing a contract. Considered a form of
collusion, big rigging is illegal under the Sherman Act, our government's rockstar market
regulator.
The bottom line: Even if “you know a guy” keep the bidding process honest on both
sides. Everyone will end up better off.
3. Price discrimination: Anti-favoritism
Price discrimination is the strategy of selling the same product at different prices to
different groups of consumers, usually based on the maximum they are willing to pay. The
practice also surfaces in hiding lower priced items from customers who have a higher
willingness to pay. This one is a little tricky, because it is socially accepted in some cases,
yet rejected in others. For example, very few people would complain that the 80 year old
man and his 2 year old great-granddaughter pay $10 less to enter the carnival. Yet, only
showing the more expensive hotels to more affluent customers caused an enormous
amount of PR backlash for travel site Orbitz.
Clearly, there are a lot of different manifestations of price discrimination. Legally, the main
law on the books, the Robinson-Patman Act of 1936, is exceptionally outdated and has
more holes than my favorite swiss cheese.
The bottom line: Charge different types of customers differently through product
differentiation, bundling, and the like, but be exceptionally careful about communicating
differences in price. Sometimes a PR backlash can hurt much more than a legal one.
Check out more on communicating price changes (article is a bit tangential, but
educational).
4. Price skimming: Discriminating through time
Once again, another shady area. Price skimming is when the price for a product is first
sold at a very high price and then gradually lowered. The goal here is pretty obvious,
producers want to capture each step on the demand curve; consumers who are willing to
pay more buy the product first, and then a new groups’ purchases are triggered with each
decrease in price.

This strategy is most commonly seen in the tech industry, as some consumers are willing
to pay a premium price for the newest gadgets. Apple is a prime example, as prices drop
within months of a release and new iterations happen within six to 12 months. Like price
discrimination, this practice isn’t illegal, but if too obvious and not tested enough, it can
trigger an unfortunate PR backlash. Apple received a lot of flack for cutting their production
cycle on the latest iPad, instantly lowering the prices of the older models.
The bottom line: Find ways to lower prices to new tranches of customers discreetly.
Coupons, promotions, and lightweight versions of a product are all exceptionally effective
while keeping the same number on the page. Check out more on how Apple crushed the
latest iPhone price optimization. 
5. Supra competitive pricing: Monopoly gouging
Sometimes the value that consumers place on a good is much greater than the cost of
producing that good. In such cases, there is controversy about whether the corporation is
justified in charging a much higher price and matches the perceived value. This situation
can take place during a shortage, such as the price of food or fresh water after a
hurricane, or when a certain product is the only one of its kind available. Pharmaceuticals
and the patents that surround them are a great example.
Producers in these instances can charge an exorbitant amount of money, but should they?
I think we’d agree that setting skyrocketing prices for food or generators following a
hurricanse is wrong (and some states have laws against it), but most software costs are
relatively cheap compared to the value provided to a customer. Very different contexts, but
more generally, some consider taking advantage of consumers' needs unethical, while
others feel like it's an inevitable result of a free market and a just reward for innovation.
The bottom line: This is a common sense scenario, but a good litmus is to ask yourself if
the pricing change hinders an individuals’ necessities. Software products are phenomenal
for improving efficiency, but if the Internet blew up tomorrow, we’d still need food and
water.
In summary, see the forest for the trees
Don’t do anything illegal when setting or changing your prices, but even with the
questionable practices, always step back and think about what the price looks like from a
customer’s perspective. You’re not building a quick sale business. You’re building
something sustainable, so make sure to avoid any and all pricing PR disasters.
TRABAJO FINAL SOBRE LA FIJACIÓN DE PRECIOS

 En grupos de tres estudiantes desarrollar las siguientes actividades y

preparar un informe y una presentación para socializar con todo el curso.
 1- Seleccione una categoría de productos de las siguientes: Productos para
bebé, aseo personal, calzado deportivo, Perfumes, Ropa formal, ropa
informal, Ropa interior femenina o masculina, Bebidas alcohólicas, Snacks,
Café, Té, Refrescos, Bebidas energizantes, Electrodomésticos,
Computadores, Alimentos enlatados
 2- Identifique las características, beneficios y atributos de los productos
haciendo una comparación entre al menos 3 marcas productoras de los
mismos.
 3- Establezca, basado en las variables de segmentación más apropiadas, las
características del segmento al que van dirigidos estos productos.
 4- Haga un “Price Tracking” o muestreo de precios de los productos en
estudio en al menos tres canales de venta (grandes cadenas de retail,
tiendas de barrio, tiendas especializadas, tiendas de descuento, Internet)
 Construya con la información recolectada un cuadro comparativo de precios
por marca, producto y canal.
 Haga un análisis y explicación entorno a los tipos de estrategias de precios
utilizados y argumente el porqué de las diferencias al menos en el momento
de tomar esta muestra.
 Utilizar para las diapositivas de la presentación las imágenes de los
productos y sus marcas y si es posible videos publicitarios que sirvan para
argumentar las estrategias de precios.